Deposit Takers Bill

I present a legislative statement on the Deposit Takers Bill.

DEPUTY SPEAKER: That legislative statement is published under the authority of the House and can be found on the Parliament website.

Hon GRANT ROBERTSON: I move, That the Deposit Takers Bill be now read a second time.

I want to take this opportunity to thank members of the Finance and Expenditure Committee for their hard work on the Deposit Takers Bill. It is a piece of legislation that is very important and significant for a number of reasons that I’ll talk about in the coming minutes. But I also want, in light of the recent outbreak of unity across the House—or near unity—in the last piece of legislation, just to credit all members of the Finance and Expenditure Committee for the way in which they undertook their work on this bill. They made a number of changes that I believe are both important but also in keeping with the spirit of the legislation, and I do acknowledge the Finance and Expenditure Committee members for doing that.

Just to recap briefly, this is the third in the trilogy of pieces of legislation that emerged out of the review of the Reserve Bank of New Zealand Act that we undertook on first coming into office at the end of 2017. The first two bits of that legislation dealt with the objectives of the Act and the decision-making powers of the Monetary Policy Committee; the structure of the Monetary Policy Committee. Then we moved on to the administrative side of the bank’s operation, including the role of the board of the Reserve Bank. And finally, this piece of legislation, the Deposit Takers Bill. This is a very important bit of legislation in terms of the way that our prudential, and regulation and supervisory environment for our banks—and, indeed, our deposit-taking sector in general—operate. It is a piece of legislation that seeks, in large part, to modernise the way in which this legislation works with respect to deposit takers and with respect to the standards that they operate under.

It also does something that is extremely important, in that it establishes a Depositor Compensation Scheme. I can tell you that earlier in the year, when we saw issues arising with Silicon Valley Bank and Credit Suisse and others, the emails began to come in with increasing regularity from New Zealanders wondering when this piece of legislation would be passed. This is something that is, I would say, beyond time for Parliament to catch up with, and I am very pleased that we had this work well under way so that it can be passed through the House. I hope it will move swiftly through the House from this point and then be able to come into operation fully next year, once some of the further consultation work by deposit takers is done. It is important that New Zealanders have confidence in the financial system in which they put their money. They can have confidence in that system; it is a robust system—it has been analysed time and time again to be so—but that does not stop people wanting the confidence that there is some kind of backstop scheme for their deposits. And that is precisely what the Deposit Compensation Scheme is designed to do.

I’ll just spend a little bit of time on this aspect of the legislation before returning to talk about a couple of the amendments that the select committee made that, I believe, are very important ones. I note that the absence of a deposit protection or compensation scheme is something that’s been on the agenda for some time and something that many New Zealanders would want. We are, in fact, one of only two OECD countries without some form of deposit protection scheme, and establishing this scheme is a major element of the reform process I mentioned at the beginning. What the scheme does is it aims to stabilise New Zealand’s financial system by providing each eligible depositor with $100,000 of compensation protection for their protected deposit at each deposit taker. The estimate we’ve had is that this will cover more than 90 percent of depositors. Broadly speaking, compensation will be payable when a deposit taker is in difficulty that causes disruption to the ability of eligible depositors to access their protected deposits.

As most people will understand, setting up a fund like this requires it to be funded, and that will be done by charging levies to those deposit takers. This is backed up by public funds should the balance of the Deposit Compensation Scheme fund be insufficient to meet its compensation obligations. It is a significant new function for the Reserve Bank, and I think we should acknowledge that, as the Reserve Bank now has the role of collecting levies, managing the fund, determining entitlements, and making compensation payments. But it is an important further rung in making sure that people are aware of what is needed when it comes to protecting our financial system. I think most submitters were in support of the legislation in this respect, but it is going to take a little bit more time to make sure it’s fully put in place as banks finalise the way in which they make their payments, they make their levies, and the Reserve Bank puts the scheme together. But we are now moving to put ourselves in line with the rest of the world when it comes to these sorts of schemes, and I do think it’s something, on this side of the House, we’re proud to be able to bring forward—albeit acknowledging that our financial system and the health of our financial system is sound. There always has to be a worst-case scenario plan, and this is it.

I would note that, in the recent past when New Zealanders have been faced with financial institutions that have collapsed or have, in some way or other, not performed as they had hoped, they did look to the Government to find a way to support them rather than having to deal with that in an ad hoc way. What this legislation does is ensure that we have a comprehensive scheme that deals with the way in which that will play out. So, on that particular clause of the bill, I am very proud to see it come forward. A number of the other provisions in the bill are, essentially, addressing recommendations made by the International Monetary Fund when they reviewed New Zealand’s financial regulations in the 2016-17 year. That creates a broader framework for regulation and supervision of our deposit takers. In doing so, it elaborates the objectives for a new regime, modernises the licensing processes, provides for a range of prudential standards, expands the suite of supervisory and enforcement tools, and improves the crisis management and resolution framework. All of these might sound technical to people that are out there, but it is, essentially, the underpinning of the schemes that New Zealanders put their money in—and they need to have confidence that, at every stage and at every level, there is proper supervision and proper regulation around that.

I think, again, that both the work that we did through the review and the work that the committee has done has ensured that that framework is now in place and does give confidence to New Zealanders about the way in which that work will be done. The Reserve Bank itself has its objectives as a prudential regulator enhanced by this legislation, as it did when we did work on its monetary policy role in that regard as well. It also modernises licensing to ensure, essentially, that the deposit takers themselves are able to move reasonably swiftly through that process. As I said before, it strengthens a number of standards that are required in order to meet the prudential rules of the Reserve Bank. Areas where standards may relate to include governance, remuneration of directors and senior managers, capital liquidity, security interests, credit ratings, loan concentration, risk exposure, risk management disclosure, and internal controls and assurance. All of those are things that, essentially, happen behind the scenes at a bank or a deposit taker, but they’re areas where we do need greater confidence, and I’m very pleased to be able to see them come through in this legislation as well.

I just want to finish by reflecting on really the critical changes that I think the Finance and Expenditure Committee have made, in particular the changes to the purpose and principles clauses that the committee has made around, essentially, proportionality but also ensuring accessibility of financial products and services. This is important because, along with making sure that we have a sound financial system and one in which the public can have confidence, we also want to make sure that the public have access as well. So there is now a new subclause within the purpose clause that says, “to the extent not inconsistent with [those soundness and safety objectives] to support New Zealanders having reasonable access to financial products and services provided by the deposit-taking sector.” I regard that as a very significant and important change that the committee have advocated for.

That’s then backed up as we move through the clauses of the bill into the principle section, where a new principle has been added saying that the deposit-taking sector comprises “a diversity of institutions to provide access to financial products and services to a diverse range of New Zealanders.” That, again, is important. While we all know—and it’s laid out and in the hierarchy of the Act—that having a safe and sound financial system is the goal of this legislation, adding to that the fact that, within that, accessibility is important and that a diversity of institutions provide services to a diverse range of New Zealanders, I think, enhances this legislation, makes it more relevant for the times we live in, and I want to thank, again, the committee for that work that they did.

In the interests of time, I won’t be able to go into the proportionality framework, but I know other speakers will do that when they speak. This bill has been—

Hon Member: Yes, we will.

Hon GRANT ROBERTSON: —as I’m sure they will. This bill has been improved by the select committee, I think it is an important piece of legislation, and I look forward to its swift passage from here into law.

The question is that the motion be agreed to.

Thank you, Mr Speaker. It’s a pleasure to be talking on the Deposit Takers Bill, and National will be supporting this bill. Like the Minister said, this is one of the few occasions where a committee has worked genuinely to try and get a better outcome for this specific bill. I think some of the changes that the committee have put forward are very helpful in that regard, so I just want to acknowledge members of the Finance and Expenditure Committee and also the submitters that helpfully identified some of the key issues with the original proposed bill.

But, on that note, and just on a wider concept, as the Minister said, this is the third of three changes to the Reserve Bank. Obviously, we’ve had quite a significant restructuring of the Reserve Bank, which is normally done in a bipartisan manner—unfortunately, that hasn’t occurred, which is a concern to us, “us” being National—but this, where we’ve seen changes to the monetary policy framework, general Reserve Bank changes, is the third one around prudential policy. Many people don’t understand what that means, but it’s about putting in place the right financial frameworks, capital adequacy oversight mechanisms, as a regard in this particular bill to financial institutions. But it also relates, in a potential sense, to other institutions such as the insurance sector, and we are concerned about how this is going to be overseen by the Reserve Bank, and particularly the skillset—or in some cases the lack of—by the members of the board of the Reserve Bank, and whether in fact we’ve got the right framework going forward.

But on that note, I just want to turn specifically to this Deposit Takers Bill. As the Minister correctly pointed out, it has some very significant aspects, the first of which is around the protection of deposits up to $100,000. This is something we discussed at length and, as the Minister quite correctly pointed out, New Zealand is an outlier in the sense that we don’t have deposit taker insurance. This has been set at $100,000, which we thought was an appropriate level. What we did do as a committee was exclude foreign money held by New Zealand institutions in foreign bank accounts. It’s an issue that we looked at quite carefully. We wanted to make sure that people weren’t able to use the scheme in a way that wasn’t really about protecting the base $100,000 invested or held by New Zealand banking institutions and non-bank deposit takers. So we put some rules around the $100,000 and just made clear that, if there was a shortfall in the levies, the Minister of Finance could step in and make that shortfall up, which is quite a legislative change, because that would require him or her acting without necessarily having parliamentary scrutiny. But what we did require was that any such actions were subject to parliamentary scrutiny.

Also, in terms of the levy itself, we wouldn’t support a levy system that helped promote the idea that people could just recklessly put money on deposit and hope that the scheme was going to benefit them. We would want to make sure that there was no excess cost to depositors. So there’s some rules around that. Obviously, we haven’t seen the rules around how levies are going to be set, but we do want to make sure that they are appropriate, and it will be something we will be monitoring very carefully.

On other issues of this bill, a prime aspect about this was about making sure that the 13 non-bank deposit takers weren’t unduly disadvantaged by an overreach in terms of the Reserve Bank placing restrictions and regulations over the top of them. When I talk about non-bank deposit takers, I’m talking about credit unions; I’m talking about building societies and retail-funded finance companies. These are reputable companies that are subject to Reserve Bank oversight—that, as such, they comprise regulated financial institutions, which has a technical meaning. What we were very concerned about—and I do acknowledge some of the members on the committee—was making sure that they are protected, they are looked after, and they’re not drowned in regulation. Our prime concern was to make sure that, even though the New Zealand banking sector is dominated by four Australian-owned banks, these non-bank deposit takers hold a very important role in terms of the different type of finance they provide—to, in many cases, vulnerable New Zealanders or people who find it more difficult to access traditional forms of finance and banking services. So we were very careful to make sure that the Reserve Bank was mindful of that and had explicit regard for that fact.

In fact, we required that the bank actually set out enough clarity around how it was going to set the standards for those deposit takers. We wanted the bank, and required the bank, to actually publish and keep up to date a proportionality framework. This is very, very important, and I know many people from the non-bank deposit takers were very keenly interested in this point. My personal view is that I think where we’ve ended up with the provisions in this bill is adequate to have regard to proportionality. We’ve made it very clear to the Reserve Bank that they are to have sufficient regard for this, and we’ve made sure in the commentary to the bill that that point is very clearly set out so, if there is any dispute, people will be able to turn and look at that commentary that prefaces the bill and see what the intent of the committee was. That is a very, very important aspect, and I think it’s important that we let the legislation work now and see whether, in fact, we struck the right balance. Of course, we can always come back later and add further provisions if we need to, but my personal view is that, where the committee has landed, it provides enough clarity for people and enough opportunity for people to be involved in that process, to make sure that we get a proportionality framework that is fair and equitable and does deliver different forms of finance to New Zealanders who are seeking such requirements.

Another example of that is that there was a proposal to carry over the credit rating provisions in the previous Act. We said that that may not necessarily be required or appropriate to non-bank deposit takers. There are two aspects to that. We said that, in determining whether the Reserve Bank should impose a credit requirement credit assessment, they should have regard to the size and nature of the deposit taker’s business and, secondly, whether or not the risk of not having a credit rating could be mitigated by applying additional terms or conditions to the exemption—so, again, trying to take a practical aspect to that.

There was also the issue around liability of directors and CEOs. Again, the bill anticipated that directors would be liable for failings if there weren’t proper checks of the information being provided to the Reserve Bank. It wasn’t proper, wasn’t exactly accurate, and the big issue we contested is whether in fact that was appropriate. We’re talking of, in many cases, very large institutions, and directors should be able to rely on senior executives of those institutions, particularly if they’re banks. So, in the context of where a director might potentially be liable up to $1 million, we thought that there needed to be a better balance struck between the liabilities of directors and the ability of directors to be able to rely appropriately and diligently on the efforts and the conclusions of the executive team. It doesn’t absolve directors if they act inappropriately, but it does provide for a reliance on executives, and we made sure that that came through in the bill—and also in respect of foreign-owned companies, where they should be able to rely on CEOs, because in many cases they don’t have directors directly involved in managing those businesses. That was an important component of this bill, and I think another important aspect to it.

We’ve run out of time, but I’m sure my colleagues are going to pick up other parts of this important bill. Thank you very much.

At the heart of this bill is stability, as we’ve seen after the bank Credit Suisse experience overseas, but also the confidence that that provides to consumers. That’s very clear in the purpose, but I just want to pick up on the point around inclusion, which is something the committee took very seriously.

We started off by hiring an independent adviser with a specialty in financial inclusion, Vijay Kumar, and I really want to thank him for his input into our thinking. When we looked at financial inclusion, it’s quite a vague term, but we were able to dissect it and come up with elements that lead to inclusion, including access and diversity.

As the Minister mentioned, there are two elements to the diversity that we’ve imbedded with our recommendations. One is around diversity of deposit-taking provider or bank; the other is around the diversity of the clientele and of access for all New Zealanders. These are, indeed, really important principles, particularly on this side of the House, where we appreciate that different people have different needs at different times.

The second thing, really, that I wanted to speak about was the proportionality—which, again, has been alluded to by the member opposite, Andrew Bayly—taking into account governance, capital, and liquidity, and so on. I would like to say that the Reserve Bank is the one that will be creating that proportionality framework. We were really mindful that the Reserve Bank were also the advisers to the bill. We wanted to see some accountability, we tossed this around, and we have recommended very strongly in the commentary that we would like to see the Reserve Bank come back to brief the committee of a future Parliament before that framework is finalised.

Now, that’s something that I cannot stress enough, and it’s something that we as a committee took very seriously and we expect to happen. If the proportionality is not as we expect it to be, then we would like to be able to have some oversight of that, or have a future committee do that, to ensure that the proportionality that will make this bill workable will not have a chilling effect on the sector when it comes into play. I am really wanting to put that on the Hansard to ensure that the Reserve Bank does come back and report back prior to the finalisation of that proportionality framework.

Otherwise, it’s fantastic to be working in such a collegial committee. It’s a great bill and I commend it.

Thank you, Mr Speaker. As my colleague Andrew Bayly outlined, National is continuing to support this bill. We want to see a stable and efficient financial system for New Zealand, and we think it’s important for the stability of our financial system that depositors have confidence that they will be able to obtain and use their deposits despite events that may occur in the financial system.

We’re conscious that the debate on this bill is occurring in the shadow of the collapse of banks overseas and that those collapses have potentially been exacerbated by the reality that in modern times, with digital banking, once there’s a run on a bank it happens extremely quickly, and that development is the reality in which this bill is being debated. However, we are also conscious that this is an area where, in a desire to protect our fellow citizens against risk and to ensure that they can be confident in being able to obtain their deposits, we could potentially overregulate to the detriment of deposit makers, such that the cost of banking is increased not only by the cost of the regulatory impost and the levies needed to secure the scheme but also, potentially, by suppressing the competition that we wish to see in a healthy financial sector, by advantaging those who are able to operate within a detailed or a complex regulatory environment and making it much harder for smaller deposit takers to compete in that environment.

So, taking that balance of the need to protect deposit makers but also to ensure thriving, healthy competition and low cost for bank users, this is an area where detail really matters, and so I want to join other speakers in commending the members of the Finance and Expenditure Committee, who have worked, I think, very hard to strike the right balance between those competing challenges to make sure that the cost imposition and the adverse impacts or unintended consequences of regulation in this area have been thought through and, to the extent possible, minimised.

I think that—and I certainly hope that—in the back of the minds of those sitting on the committee are other recent well-intentioned exercises that have related to banking regulation. The case that I think of and that New Zealanders raise with me weekly is the changes made to the Credit Contract and Consumer Finance Act, the CCCFA, which as legislative instruments were very well intended, which was to go after loan sharks and those who are predating upon New Zealanders in their lending. While the legislative instruments may have had a good intention, in practice the detail of the regulation in that area was so prescriptive that it has not only cut off credit to many low-income and low-wealth New Zealanders, who are now in many cases seeking alternative credit through less appropriate, unregulated forums—including, I’m reliably informed, the gangs—but has also added huge amounts of cost and potentially lessened the ability of banks to compete appropriately in this area.

Hon Dr David Clark: Point of order.

NICOLA WILLIS: Returning to the bill at hand, as David Clark makes his point of order—

DEPUTY SPEAKER: Point of order, David Clark.

Hon Dr David Clark: Thank you, Mr Chair. I’m just seeking your guidance: the member’s talked for quite some time on a completely different—

DEPUTY SPEAKER: Yeah, Mr Clark, that’s what the Speaker’s job is. Sit down.

NICOLA WILLIS: Thank you, Mr Speaker.

DEPUTY SPEAKER: I will say, I was just about to say: time we did come back to the bill—without the assistance of that member.

NICOLA WILLIS: Yeah, thank you, Mr Speaker. Look, to make my point about why this is important for this bill, this is a bill which the select committee grappled with, because part of what we had to do was think about how the Reserve Bank, how officials, would create regulations within the scope we put in legislation. What we had to think through in detail is how we would ensure that Parliament’s intent was properly reflected in that regulation. The reason I make my point about the CCCFA—and I understand the Minister previously responsible for it is sensitive about it—is that there can be a gap between intention and practice.

So, coming to the detail that we did discuss at select committee and that is important here, the first point that I think the select committee was focused on, appropriately, is the desirability of a diversity of institutions in the deposit-taking sector, which is to say we didn’t want to have a regulatory framework which unintentionally made it very difficult for those who weren’t large banks to operate within that sector and which created barriers both to their entry and to their operation in practice. The select committee also shared a view that it was going to be better for New Zealand consumers and New Zealand users of bank services if there were different options for accessing finance.

It’s from there that the proportionality framework that the previous member also referred to came from. An example of that that we discussed is the current requirement that there be a credit rating for an institution, which can be waived under the current settings. There are currently exemptions for it, but in this bill those were not necessarily going to be carried over, and what we considered as a committee was the gap between us relying on the fact that the Reserve Bank would put those into practice and whether or not that needed to be explicitly in the legislation. The point here is that we are, with this bill, handing over considerable regulatory judgment to officials, and I think what you’ve seen through previous speakers, and what I would also put on the record, is the very clear intent of the parliamentarians on the select committee that we want to see that that regulatory framework doesn’t have an overbearing impact, such that it precludes competition or such that it precludes some deposit makers having access to a diversity of financial options.

I think that what we have in front of us now, having come through the select committee process, is a bill that is much friendlier to smaller, non-bank financial institutions than it would otherwise have been, because of the good efforts of people on the select committee. But despite, and because of, those intentions, I do want to once again put on the record the concern, certainly from members on this side of the House, that it will be particularly important that regulations made in this area live up to those intents and that the effect of the regulation is monitored carefully to ensure that it isn’t having perverse effects.

You know, I say this against the backdrop of an issue that I think is relevant to this debate, which is the concern many New Zealanders have had about whether or not there is adequate competition in our banking sector. It is obvious to me that we do have a banking sector in New Zealand that has had a huge amount of regulatory change, all of which has been well intentioned but about which there is a question that needs to be asked: what is the price that New Zealand bank users are ultimately paying for that regulation? So, therefore, we as parliamentarians do need to strike the right balance on these matters.

I’d note that as we discussed the bill at select committee, and even as this bill continues to pass through the House, there is the ongoing discussion about the adequacy of competition settings in the banking sector that’s gone on, and while there’s been a lot of heat on the other side of the House, they are yet to initiate any form of inquiry into that. We on this side of the House continue to think that this is a matter that it would have been prudent for a select committee to look at in some detail, the observations from which could’ve potentially fed into making this also a better bill with better guidance for those creating the detailed regulations.

So, in sum, National continues to support this bill as a step to promote the stability of the financial system and to protect New Zealand bank users. We have been concerned to ensure that the regulatory framework is not overburdening and that it continues to support healthy competition in the sector. We think the regulation in this area will be critically important, and we will continue to be watching this very closely.

Thank you, Mr Speaker. On this side of the House, we are supporting the bill for some of the reasons outlined by the previous speaker, Nicola Willis. Ultimately, financial stability is a public good that supports the prosperity and wellbeing of New Zealanders. Financial stability is something that is critical to a central banking regime. This is a long-identified gap in the system, and I want to thank those members of the Finance and Expenditure Committee from across the House who turned up regularly to these hearings for the contributions that they made, because I think it was a really good select committee process—at least the parts that I was privy to. And particularly Andrew Bayly, I want to acknowledge, on the other side, for the work that he did in making sure this was a better bill, and Ingrid Leary, as chair, along with her predecessor from Dunedin, Rachel Brooking. In fact, there were four members from Dunedin on the committee at one point—not half the committee in numbers, but certainly spiritually and morally, at least, half of the committee—driving forward this excellent piece of legislation.

I do want to quickly touch on what the previous member spent three of her first five minutes talking about, which was the Credit Contracts and Consumer Finance Act, just to correct a couple of anomalies.

DEPUTY SPEAKER: No, you won’t, Mr Clark. Having now pointed out the error of the previous speaker, you will stick to the bill.

Hon Dr DAVID CLARK: I won’t point out the anomalies then, Mr Speaker—

DEPUTY SPEAKER: No, you won’t. You will stick to the bill.

Hon Dr DAVID CLARK: I will say that we support this bill. It is a bill that will make a real difference in addressing a gap in legislation. We have a low proportion of New Zealanders who are non-banked, and that’s the way we want to keep it. We want New Zealanders to be confident in their banking. We want a banking system which supports the welfare and wellbeing of New Zealanders. We want adequate Reserve Bank supervision to remove moral hazard and the kinds of changes proposed in the proportionality framework, which are there to ensure that we have a wide range of banking services available, including those that are more approachable for those who might not traditionally access banking services.

An excellent process. Thank you to those who submitted, and thank you to the committee. I believe this is a better bill as a result of the process, and I also want to credit our finance Minister, the Hon Grant Robertson, for the tremendous work he has done across these three pieces of legislation. The banking system will be a better one at the end of it, and a good deal of that is due to his consistent endeavour in this area. I commend this bill to the House.

Thank you. As the Minister of Finance said, this is part of the trilogy. Today, we wanted to focus on the other side of the equation, in this second reading: that, when not done carefully or explicitly well, deposit insurance can fuel bank crises by giving banks perverse incentives to take risks. And the country that adopts explicit domestic deposit insurance can also have to grapple with not just the stabilisation of the economy but the destabilisation effects of that insurance on a country’s financial system as well. New Zealand is now going down the road of providing a financial safety net at the expense of the taxpayer. A proper and full safeguard against this would have been asking the banks—within their activities—to hold more capital. This would have been a more powerful mechanism.

Moral hazard by banks, and increases in the likelihood of financial crises due to excessive risk-taking, is something that is directly linked to deposit insurance. So that the House is clear: in reality, deposit insurance is not really insurance at all; it’s but a guarantee against loss. It should be covered by the banks holding a greater risk of enterprise capital, and the social and regulatory capital that a Government has called upon, and the taxpayer has called upon—in terms of a bank failure—cannot match that. We should have learnt from South Canterbury Finance and the BNZ examples. And I’d just like to correct the Minister on the use of the Silicon Valley Bank scenario: they had depositor insurance of $250,000. It wasn’t the retail investors, there, that caused that bank run; it was actually the wholesale investors—plus, they weren’t subject to the Basel rules. In New Zealand, we’re not subject to those, either, but to rules set by the Reserve Bank, and so we have an isolated system here that allows these types of laws and the trilogy to be adopted.

This legislation is claimed to close the gap between New Zealand and international practices. Mr Robertson said it provides economic security for eligible New Zealanders if their bank or other deposit-taking institutions fail, while helping protect the country’s financial system. The $100,000 limit, interestingly, was doubled after consultation and now will fully protect 39 percent of depositors. The scheme, according to the bill, will be funded by levies on deposit takers and supported by a Crown backstop. It’s our opinion in the ACT Party that the New Zealand banks are really well capitalised and are becoming even better capitalised thanks to the Reserve Bank of New Zealand’s (RBNZ) new rules, which phase in over seven years from 1 July last year. The “big four” banks are each owned by Australia’s “big four” banks and have long been better capitalised than their parents—and that’s just on a superficial level. But New Zealand’s capital rules are more conservative than Australia’s and are becoming even more conservative.

Years ago, the Australian Prudential Regulation Authority decided that they’d set common ratios, and they are all risk-weighted against assets and seem very healthy to us. Explicit guarantees have immense political appeal because they assuage citizens’ concerns about the safety of their deposits and thus increase the flow of funds into banks without requiring any fiscal expenditure. Deposit insurance as defined in this bill seeks to reverse the psychology of bank runs by reassuring depositors that, if the bank fails for any reason, their funds will be protected up to the limits on coverage. We have generally opposed deposit insurance, but there are viable arguments on both sides. Those favouring deposit insurance believe de facto, unpriced insurance already provides if the Government will be likely to let depositors eat the losses in any operation of the Open Bank Resolution (OBR) framework. It isn’t crazy to believe that it could be the case for some deposit takers. I think it’s really better for the Government to clearly signal that it will not provide bailouts; that the OBR framework will be allowed to run its course; and that, with depositors having some proportion of deposits frozen while the banks are sorted out, the Government will not provide compensation for total losses.

The RBNZ has already set very high prudential reserves to make failure less likely, and I worry that it will be impossible for the Government to get the risk premiums right on any insurance product when banks and non-bank deposit takers are all lumped into the same framework. Setting the insurance premium on riskier outlets too high and you can crash the industry as depositors leave. Set it too low and deposits flood in in pursuit of higher gains. In normal insurance markets, if one sector’s being sharply overpriced by an existing insurer, a competitor has some incentives to go in and offer a better premium. This can’t happen within Government-provided deposit insurance. So countries considering explicit deposit insurance should watch out for what they wish for. Unless a country has a strong banking regulation, a strict full-banking regime, carefully designed deposits, depositors, while holding moral hazard in check, can suffer the consequences.

Let’s be honest with the people of New Zealand that a lot of people are financially illiterate and time poor, and they don’t really understand what a Moody’s or S&P rating means to the consumer and their deposits. If you make a bank deposit today, under this framework, it is essentially an unsecured loan where the depositor is the first to take a 100 percent haircut, with no recourse. Depositors are at the bottom of the food chain. The deposit is the property of the bank. So have we learned from South Canterbury Finance and the BNZ in relation to this bill? It’s questionable, but the Finance and Expenditure Committee tried to bridge that gap.

So, really, insurance deposits—it’s just another tax. Where is the increase in capital and adequacy anyway? Banks can lend recklessly going forward. So, if they go bust, taxpayers pick up the tab. Bailing out the highly profitable New Zealand retail banks must have much moral hazard. Cyprus had deposit insurance: the cash was frozen. It turned out that it wasn’t worth the paper it was written on. It will also lead—these costs—to lower term-deposit rates. There’s no such thing as a free lunch, and yet the system will continued to be allowed to live on at the edge. It’s time for the banks and their shareholders to manage this risk and their activities appropriately, and for the taxpayer of New Zealand not to be on the hook in a serious financial situation.

Tēnā koe, Mr Speaker. I rise to speak in support of this bill, the Deposit Takers Bill, on behalf of the Green Party. I think it is worth noting—since we have, I believe, the National Party supporting it, and the Labour Party, of course, brought this bill to the House—that the main purpose of this bill, bringing in the deposit compensation scheme, which would protect $100,000 of people’s personal deposits in the case of a bank failure, is something that the Green Party has been campaigning on. In fact, the oldest reference I could find in the media, from Russel Norman, was March 2013—so over 10 years ago. Russel Norman was consistently saying that we should have a deposit compensation scheme, that this was something obvious we could do that would help protect New Zealanders, and, 10 years later, here it is with the support of the two main parties. So that’s good; the Green Party makes a difference. It takes a while, but we get there. Finally, the other two, larger parties pick up and support the things that we’re saying. It’s fantastic.

The other thing I wanted to say about this bill, coming out of the Finance and Expenditure Committee—and, unfortunately, I wasn’t on the select committee to hear the submissions—is that I was really pleased to see that the select committee had considered a proportional scheme, to take into account the concerns of the non-bank deposit takers, like credit unions and building societies. Non-bank deposit takers, like credit unions, have an incredibly important role to play in our economy, in supporting their members with access to finance and in a really personal way. I think that credit unions have huge potential, but right now, when they have to compete with banks, which have much bigger budgets for advertising, which have kind of cornered the market in terms of the services they’re able to deliver, it is quite difficult for them. So it is inappropriate for them to be regulated in quite the same way that the large banks are.

Over the last few years, we’ve seen that the four biggest overseas-owned banks in New Zealand have made record profits. They seem to be going up every year. Even in 2020, they were positive. At no point during the different challenges that we faced economically during COVID, during the lockdowns, have the banks taken a loss, and while we do want banks to be stable and we want a stable financial sector, there is a lot of room between stable and profitable and excess profit, where they are, basically, sucking money out of our economy. I think it’s arguable that the four biggest banks in New Zealand are in that position now, and we would have liked to see the Government look at something like a bank levy. In fact, while inflation is hitting households really hard and they’re having to pay higher interest rates on their mortgages, they’re having to pay higher food prices, a big part of the component of the higher food prices is higher interest rates that the farmers are having to pay. So, throughout this whole process of raising interest rates, in a way we might be contributing to inflation, and at the same time the banks are just doing even better than ever out of this. So, at a certain point, we need to ask them to ensure that we’ve got a fair way to ensure that they are giving back to New Zealand and not just taking from our economy.

So, yes, a win for the Green Party in this bill—happy to see the changes that take into account the particular needs of non-bank deposit takers like credit unions and building societies—and we need to see some stronger moves from the Government on the enormous bank profits, which are, basically, sucking value out of the New Zealand economy and making inflation worse.

It’s my pleasure to take a call on the Deposit Takers Bill. I just want to add another layer to what has already been said, and, not being from a legal or finance background, I tend to look at this slightly differently.

This bill is particularly important in the era of social media. Social media is now a new force in the banking crisis. You know, we look at Facebook, it began in 2004, and Twitter began in 2006, but they were not yet global and all-pervasive during the 2008-09 global financial crisis. Social media connections clearly fuelled the run on Silicon Valley Bank and Signature Bank earlier in the year.

One thing in my mind, as a member of Finance and Expenditure Committee, is to understand how the likes of Credit Suisse private banking clients around the world got the message to flee. What if, in the future, a similar run starts on complete falsehoods about a solvent bank, for example? It would be plausible for a Facebook flee scenario to play out here in New Zealand. One way that we can safeguard against this is to give consumers upfront confidence that their deposit takers are regulated and that the consumers’ cash is safe. That’s why there’s a crisis management function to this bill.

This bill will force the Reserve Bank to supervise more actively to prevent moral hazard and the temptation of deposit takers to take more risk than they would otherwise. This is a good bill. It providers a good handrail for our deposit takers, and also our consumers as well. So I commend this bill to the House.

Thank you, Madam Speaker. It’s good to be able to rise and speak on the Deposit Takers Bill. We will be supporting this. I noted David Clark was talking before about four people on the Finance and Expenditure Committee being from Dunedin and how that was a great thing. I’m not from Dunedin, but I have spent a lot of time there, and I would like to echo those sentiments. It is a fantastic place—

Anna Lorck: Tell us about your time there.

SAM UFFINDELL: As is the Hawke’s Bay, Anna Lorck.

Anna Lorck: No “the”—no “the”.

SAM UFFINDELL: Hawke’s Bay or “the Bay”—apologies. There you go. Back to the bill. So this aims to increase the stability of the financial system. We’re all supporting it.

Setting $100,000 in there for people when the system comes into strife and if they’re unable to withdraw their funds or they have challenges around that is quite good in light of what’s happened in the States recently, where a couple of financial institutions in the US have become insolvent, really, and the US Federal Reserve has had to come in and bail them out. And, while we do have quite different capital structures here in New Zealand, lots of people don’t understand how that works and they don’t understand that it is a significant overextension of bond positions taken out by a lot of those US financial institutions, and when those positions moved away from them, they found themselves caught out. We don’t find ourselves in that position but, for your normal member of the public, who isn’t a member of the committee or doesn’t sit around reading the Australian Financial Review—or whatever else it may be to get themselves a financial tune-up—it is quite helpful for them to know that the Reserve Bank of New Zealand (RBNZ) is taking it quite seriously and is providing that backstop in there.

I’ve only sat on the committee a few times, but I will acknowledge that it is a fairly collegial atmosphere. Andrew Bayly makes sure that he gets his point across.

Anna Lorck: Lot of doughnuts.

SAM UFFINDELL: Anna Lorck pipes up all the time—we know that. I’ve got you into Hansard twice today, Anna—there’s a third time.

Simon Watts: Always piping up.

SAM UFFINDELL: Always piping up. But what we do get is that people are there to solve problems. And Simon Watts in front of me is definitely one of the more proficient on the committee. And when he talks, everyone stops to listen.

Simon Watts: You’re getting me emotional!

SAM UFFINDELL: There you go—it’s getting emotional. So we do support this bill because we do want a stable and efficient financial system. [Simon Watts passes a tissue box] I’ll have a tissue afterwards too, thank you.

There were a number of sensible positions that were made during the select committee process. The Hon Grant Robertson talked about the proportionality framework and said he expected one of the later speakers to pick it up. That won’t be me, but I’m sure over the other side of the House someone will fulfil the Minister’s wishes.

Andrew Bayly did raise a couple of good points there. This is one of three changes that’s taken place in the RBNZ space—one around the monetary policy framework—and he did point out a few issues around the make-up of the board of the RBNZ and questioned whether there was the prudential expertise. When I’ve cast my eye upon that list, I would probably echo the sentiments of Andrew Bayly in that regard, and I think it’s really important for the long-term stability and credibility of the New Zealand financial system that we do have experts in that field on that board.

So, in saying that, I haven’t been across too much more of it than that, but very happy to see that there is bipartisan agreement, or around-the-House agreement, on ensuring that the New Zealand financial system remains stable going forward. This bill helps further that, and I support it.

Madam Speaker, thanks for the opportunity to take a brief call on the Deposit Takers Bill. I’d also like to pick up where the member Sam Uffindell left off and give my generous praise as well to the Finance and Expenditure Committee. I was a member of the committee in the last term, and I’m sadly not in this term. You won’t have the pleasure of my company in this term, but I’d like to acknowledge all those members. I’d like to acknowledge the Minister of Finance for bringing this bill to the House, and also the submitters. It’s an important process we have here in terms of our democracy. The committee received written submissions from 32 stakeholders—I’d like to acknowledge and thank those stakeholders—and heard oral evidence from 12 of those during its hearings.

As we’ve heard before from previous speakers, at the heart of this bill is financial stability and the fact that financial stability is a public good. It’s a very important part of our country and, particularly, our economy. If we want to continue to have investment here in New Zealand, it’s important that we do have financial stability, and the Government has a role to play in that. Particularly as a small economy, it’s certainly vital that the Government sort of steps in at times to make sure that that stability stays.

The bill also clarifies the importance of separation between the Reserve Bank and the Government, so ensuring that the Reserve Bank is at arm’s length and not open to some of the politics that we see in this House. It’s important that the Reserve Bank is separate. It’s an important part of our democratic set-up here. I commend this bill to the House.

It’s a pleasure to talk on this bill, because I feel that it’s a bill where, as a select committee, a difference was made, and I think it’s a difference which aligns with the values of this Government. This is a bill that’s about securing the financial system in a way that has been—it’s a device that was used in America in 1933. It’s long been a feature of other jurisdictions that we guarantee deposits like this to stop runs on banks, and it is one that is funded by levies from those banks.

But what we didn’t want to see happen here—and it is what we listened to submitters about—was the upending of our smaller cooperatives and our building societies, etc. I belong to one of those, and I belong to it because the profit comes back to me. It’s a cooperative, and I’m very proud of belonging to it. I really wanted to see those littler competitors to the big Australian banks come through and thrive, and they have a much lower risk rate than the big banks do. We have built into this law principles of proportionality, which means that when the Reserve Bank is setting the framework, it will consider the plight of those banks and the need for it, because those banks really give access to a lot of people in our society who otherwise wouldn’t have as much access as they are given.

So I’m really proud of that particular addition, because I think that speaks to a value that is growing in our society—that kind of value of access and the need to do that—but I think it also speaks to the big banks about our support for the little alternatives. I commend this bill to the House.

Thank you very much, Madam Speaker. It is an absolute pleasure to rise to speak on the Deposit Takers Bill at its second reading. We have heard a number of very informed speakers this evening provide commentary in regards to this bill, including the Minister, the Hon Grant Robertson. As has been acknowledged by a number of speakers already this evening, it is actually one of those examples where the Finance and Expenditure Committee, which members on all sides of the House here are on, have worked collegially together in order to prepare this bill and make some changes and improvements to it. I guess that is the purpose of the select committee process, in order to place due consideration, in terms of legislation, but, importantly, to look at opportunities to improve that legislation so that it can perform its duties appropriately once it is put into law.

I want to cover a few aspects, in regards to my comments on this bill this evening. Andrew Bayly started off our overview and provided quite a lot of detail in terms of some of the challenges that we saw with the 13 non-bank deposit takers, and I’ll come back to that aspect soon. Then Nicola Willis also provided an overview in terms of the stability of the banking sector, of which this legislation does provide a significant element. But, in terms of setting the scene, really, the circumstances for which this legislation will come into effect are pretty dire fiscal and economic circumstances: a scenario in which one’s bank—and particularly if you’re banking with one of the four major banks—collapses. That’s probably a scenario where there’s a hell of a lot going wrong in the world, let alone just here at home in New Zealand, for one of those major banks to collapse.

But, you know, it wasn’t that long ago—even though a day in this place does feel like a year sometimes!—back in 2008, when we went through quite a significant period of global instability as a result of the banking crisis: that contagion of banking collapses and lack of certainty in the market; the camera shots of consumers standing outside retail banks in the UK, trying to get their money out. They always say that, as soon as the first queue forms outside the bank, it is too late, because when people lose confidence in the underlying banking sector and lose confidence in their bank, that is probably the most important aspect. No matter how strong or good your regulation is, once the consumer loses confidence, that is the point at which there is no return. The Crown—or, in that case, in the UK, Her Majesty’s Treasury—was required to come in and deal with that.

So the deposit takers legislation puts in place, in effect, a compensation-for-loss mechanism for consumers that have deposits within their banks. The reality for most people, under this cost of living crisis, is that the only thing most people have got with their banks is debt or mortgages or credit cards. But, for those who do have deposits, significant deposits—

Anna Lorck: Good interest rates on deposits, Mr Watts.

SIMON WATTS: I’m hearing some contribution, across there, in regards to the current interest rate which you can get—

Anna Lorck: Deposit rate.

SIMON WATTS: —deposit rate—but we won’t get into that detail right at the moment. But the point is that, for those who do have deposits, in the scenario—in the very, very rare example—where a major bank will collapse and the person potentially has at risk their deposit, which they won’t get back, this mechanism provides a mechanism in order to provide that compensation for loss. I think, in regards to the stability of the overall banking system, that is an important component. It is not unique; it is a component of many international banking systems to have a mechanism of that sort to provide that degree of trust and confidence in the integrity of the banking system should that scenario play through.

The other aspect—and it wasn’t lost on the committee—is in regards to the New Zealand context in contrast even to the Australian context or, more broadly, the international context. I remember conversations that we had around some of the learnings of overseas banks who have been through these phases and periods of financial collapse and subsequent banking collapse—what they have learnt from it. The Hon Paul Goldsmith was saying, can he have a call—not this evening, but maybe at another opportunity, in the third reading, Mr Goldsmith. But what was I talking about? I was talking about the aspect in regards to the UK banking model, around the exposure.

The New Zealand model is actually pretty benign in regards to even the Australian model. We don’t have significant investment banking operations. That won’t form part of our major banking operations here. A lot of the counter-party risk and the trading risk in regards to the underlying assets and liabilities on the banks’ balance sheets aren’t managed here onshore, for many of our banks. It is actually managed in Australia, and that is quite a different banking make-up. The make-up of the banks that operate in New Zealand is primarily retail banks, where offshore many of the ones which have collapsed in the past have had a much wider diversity of banking operations, which just simply isn’t the case—which means, in part, actually, again, the risk profile in a New Zealand context is significantly lower than in an overseas sense.

We spent quite a lot of time in regards to those 13 non-banking deposit takers—those credit unions and those smaller banks—which I think most of us will be able to relate to, and particularly down South. There’s a number of these entities—of course, there are in the North as well, but I was thinking about the South when I was looking across to my colleague Joseph Mooney and the great work he does in his electorate. For the 13 non-banking deposit takers, I think the challenge for them was around scale. These are small entities, making up probably less than 5 percent, or even lower than that, as a total proportion of the New Zealand banking sector. They don’t have the scale, capability, or competence in terms of staff and technical expertise that the big four do.

So a number of the challenges back from that sector—and rightly so, I think—were that we are simply not equipped to deal with the regulatory burden that such legislation will place upon them. And, as a result, the ability for them to both scale up to deal with that, but also to be able to comply with some of the regulation, was seen as a cost burden that was unevenly spread on that aspect of the sector. I think it is a credit to the Finance and Expenditure Committee that that was given due consideration, and I think where we landed, taking on board the feedback from those entities, is a position which I think is appropriate. As Andrew Bayly said, time will tell in terms of actually the practical implementation of this bill as time flows through.

The other aspect that we discussed in regards to this bill was around the role of the Reserve Bank, actually, in terms of the administration of this legislation. It was fair to say that the unfettered powers that the bill would put within the hands of the Reserve Bank of New Zealand was an area of question and debate. I think it’s not unreasonable to ensure, when the provision of powers is given to a single entity, that that needs to be appropriately balanced. We spent quite a bit of time ensuring that there were the appropriate controls and belts and braces in regards to their role. Again, I think we’ve ended up in a position where their regulatory oversight in regards to this legislation has been balanced with the fact that, actually, they and the decisions they make can result, and will result, in compliance costs and burden on a number of players—and again, as was said, more heavily actually impacting on the smaller players than the bigger players because of their ability to deal with that.

I think, just to finish off, in the interests of time—

Hon Paul Goldsmith: Ha!

SIMON WATTS: Was that a call for another 10 minutes, the Hon Paul Goldsmith? I don’t think it was, but if it was, I appreciate your enthusiasm in this speech, because it is an important area of financial stability for our country—

Andrew Bayly: It looked like you were interested.

SIMON WATTS: And it’s good to have you back, Andrew Bayly. I’ll just finish off the end of this, but, overall, the National Party will continue to support this piece of legislation in the collegial interests of financial stability for this country. It’s with that that I commend this bill to the House.

Thank you, Madam Speaker. I rise to take the final call on the second reading of the Deposit Takers Bill. The purpose of this debate is to talk through what happened at select committee.

One of the most important things that happens in select committee is when we hear from the little guys, from those that don’t have the big voice, like we have from the big banks that are, you know, Australian-owned; so to have, under this process, the opportunity for credit unions from across the country to come and talk to us about what they saw were the challenges in this bill, where they felt they didn’t have the capacity to cope with the large amount of regulation, and also for those customers who want to have the access and diversity of banking.

So, in reporting this back to the House, it is important to acknowledge the work that they’ve done to help us form the next stage of this bill. Through that, we have put in a proportionality clause that will have the framework that will be worked through in consultation. Then, what is even better, that consultation work, the proposed framework, will come back to the select committee in the next Government and have the opportunity, through the Finance and Expenditure Committee, to be reviewed. I think that that is something that we can say thank you to the little guys, thank you to the credit unions, as something that as a select committee we listened to. With that, I commend this bill to the House.